In an effort to curb cryptocurrency speculation, financial regulators are limiting the amount of money that traders are allowed to borrow. New measures may help reduce price volatility, giving institutional buyers the confidence to invest in the crypto asset class. Improved price stability could also make bitcoin more viable as a day-to-day currency.
Margin trading—the practice of borrowing money to trade a financial instrument—is especially popular on cryptocurrency exchanges, where platforms like Bitmex have allowed a trader to control a bitcoin position worth $100 with just a $1 deposit. This strategy multiplies potential profits, and losses.
When margin traders place losing bets, exchanges may ask them to deposit more money or force them sell holdings to cover their losses. When the latter happens, the immediate sale of crypto holdings can cause wild price swings and result in a cascade of selloffs. For instance, in summer 2017, a flash crash on Coinbase Pro (formerly “GDAX”) caused ether to fall from $318 to just $0.10 in an instant. The price bounced back seconds later, but a small number of traders lost almost their entire positions.